Alternative simplified method for claiming the research credit.

• Author: Cool, Erin E.

On June 17, 2008, the IRS issued final and temporary regulations (T.D. 9401, Temp. Regs. Secs. 1.41-6T(j), 1.41-8T(b)(5), and 1.41-9T(d)) relating to the alternative simplified credit (ASC) method of computing the research and experimentation credit under Sec. 41(c)(5). The ASC was enacted in December 2006 as a part of the Tax Relief and Health Care Act of 2006, P.L. 109-432. Before the addition of the ASC, Sec. 41 allowed the taxpayer to choose between two other calculation methodologies: the regular credit calculation and the alternative incremental credit calculation (AIRC). (Note: Sec. 41 is not permanent and is currently expired. Congress must act or the credit provisions will not apply to expenses incurred after December 31, 2007.)

The regular credit calculation methodology is complicated and involves a computation of a "base amount," which requires historical qualified research expenses (QREs) and gross receipts (many times going back as far as 24 years) as well as an average of the gross receipts for the last four years. The AIRC calculation methodology is somewhat simpler in that no historical QREs are necessary to compute the base amount, but there is still a gross receipts component to the calculation. The ASC simplified the calculation of the credit by limiting the base period computation solely to the use of average QREs incurred over the prior three-year period with no inclusion of gross receipts in any portion of the calculation. In addition, the ASC includes a special provision that allows taxpayers to take the credit even if they do not have QREs in all three of the preceding tax years.

Calculation

The ASC is calculated by multiplying the total amount of current-year QREs that exceed 50% of the average of the three prior tax years by 12% (see Exhibit 1). For taxpayers that did not have QREs in any of the three prior tax years, the credit is calculated using 6% of current-year QREs. Also, if any of the three prior tax years are short years, the total QREs for the short tax year must be annualized before being included in the calculation.

For a controlled group of corporations, the credit is computed for each single entity using the method that provides the greatest credit at the single-entity level. The credit is then computed at the group level to determine the method that produces the greatest group credit. Each single entity is allocated a portion of the total group credit based on a percentage of the individual credit to...